Part 2: Mixed Bag of Capital Sources

Lending remains a “mixed bag” of different sources for commercial real estate loans. When survey respondents were asked to rate various sources of debt capital on a scale of 1 to 10, local and regional banks rated the highest at 6.7, followed closely by national banks and Fannie and Freddie at 6.3 each. Sources that rated the lowest included REITs at 4.5 and CMBS and pension funds, both at 4.7.

Although banks remain a dominant source of capital for most borrowers, lending activity among banks varies widely. “Big money center banks are in good shape and lending, while regional and local banks are more affected by the compliance with the new regulations and pressure from regulators to not overextend in commercial real estate,” says Fiorilla. At the same time, some mid- and small-sized banks are very active in commercial real estate, while others have cut back, he adds.

“For 2017, I would expect modestly increased lending capacity for banks, life companies and the agencies. Those sources will be focused on replacing maturities and lending for core clients,” says Diana Reid, executive vice president and head of PNC Real Estate. PNC had $39 billion of commercial real estate loans outstanding as of the second quarter of 2016 and the bank has been posting double-digit commercial real estate loan growth for several years, which has been led primarily by new construction and term financing of market-rate and affordable multifamily apartment projects and companies. “The pace of new loan growth is now slowing, especially for construction lending, and I would expect year-over-year 2015 to 2016 [to] be in the range of single-digit percentage commercial real estate loan growth,” says Reid.

Yet new loan growth doesn’t tell the entire story. “Commercial real estate investors have lowered the leverage on their balance sheets—more cash equity and less mezzanine financing in the average commercial real estate investment,” says Reid. As such, bank commercial real estate loan portfolios look a bit different than 2006. “The average bank loan today is a lower loan-to-cost, has a higher coverage of debt service and the overall credit quality of loans is strong,” she says.

More than half of respondents anticipate that loan-to-value (LTV) ratios will remain the same over the next year, while 26 percent expect a drop in ratios and 16 percent expect LTVs to increase. Among those that do predict a decline in LTVs, three out of four anticipate a decrease of between 1 and 5 percent, while one out of four believes a decrease between 6 and 10 percent is more likely.